New Zealand Dollar pares gains near 0.5700 following softer CPI inflation figures

• Around 0.5705, NZD/USD trims its advance in early Asian trading on Thursday.
• At 3.7% YoY in the third quarter, New Zealand’s CPI inflation eases more than forecast.
• Until next week’s policy meeting, the Fed outlook is expected to set the market’s direction.

Softer-than-forecast Consumer Price Index (CPI) inflation in New Zealand sees the New Zealand Dollar (NZD) surrender some gains against the US Dollar (USD). NZD/USD is holding near 0.5705 in Thursday’s early Asian session, with the weekly US Initial Jobless Claims release due later in the day.

Annual CPI inflation in New Zealand slowed to 3.7% in the third quarter (Q3), below the 3.8% forecast and down from the previous reading of 4.1%, Statistics New Zealand reported on Thursday. The quarterly increase was 0.7% in Q3, easing from 1.5% in Q2 and falling short of expectations for 0.8%.

In its initial response to the weaker CPI release, the Kiwi slips marginally. Inflation nevertheless stayed above the upper limit of the Reserve Bank of New Zealand’s (RBNZ) target range, reinforcing expectations of a rate increase next week.

According to Reuters, market pricing currently implies a nearly 98% probability of another RBNZ increase next week. It also assigns a 100% chance to a total of 50 basis points (bps) of rises before the end of February.

Ahead of the Federal Reserve’s (Fed) policy meeting next week, traders are assessing the likely course of US interest rates. Fed Chair Kevin Warsh offered no indication last week of whether he believes further rate increases will be necessary, or when they might come.

Shaun Osborne, chief FX strategist at Scotiabank, said: “There's not really an overarching theme for markets... and I think it's going to stay that way at least until next week into the FOMC,” adding: “We need to get a sense of what the Fed's thinking.”

Kiwi remains undervalued as hawkish RBNZ signals sustain rate-rise risk

Expectations of tighter policy have gradually strengthened, according to ING analysts, who point to investors “pricing around 18-21bp for next week’s meeting since RBNZ’s Chief Economist Paul Conway delivered hawkish remarks last week.” Conway, they note, “explicitly said this month’s decision is wide open, that he sees risk to the upside for 4Q CPI and that the NZD weakness is worrying,” in communication that ING believes “felt like an attempt to drive market pricing higher.” In that context, the bank’s assessment is that, “barring a major surprise lower in CPI tomorrow, we expect a 25bp hike next week.”

ING’s currency assessment emphasises that “NZD remains cheap relative to its short-term fair value model,” while its analysts “expect it to keep recovering ground against its closest peer, AUD.” Their baseline view is that “we see NZD/USD trading above 0.570 into year-end,” with undervaluation and the RBNZ’s hawkish language together underpinning further gains for the Kiwi.

Fed retains policy flexibility as Warsh highlights investment surge and AI risks

A score of 5.6/10 on the FXS Speechtracker, against a historical average of 6.1/10, reflected a slightly softer tone in Fed Chair Warsh’s moderately constructive yet cautious remarks. His acknowledgement of being “over-scarred from the global financial crisis” points to an enduring inclination to protect against downside and financial stability risks, even while he highlights structural growth and an investment surge fuelled by “good policies.” By stressing that the October and December meetings should not be prejudged, Warsh reinforced a data-dependent approach. His observations that AI will affect demand before supply, and that its near-term employment impact remains uncertain, also temper any immediate hawkish signal for the Dollar.

At 127.51, the FXS Fed Sentiment Index remained firmly hawkish, recording a change of 0.00 points. This suggests the speech left perceptions of the policy path largely intact, notwithstanding the slightly softer FXS Speechtracker reading. An index level well above 100 indicates that markets continue to view the Fed as hawkish-leaning. However, Warsh’s attention to emerging data on output, employment and inflation, as well as tail risks, points to a more nuanced weighing of risks rather than a clear change in rhetoric supportive of the Dollar.

Technical Analysis: NZD/USD remains under pressure beneath the 100-day SMA

A tentative base within the recent range is suggested by NZD/USD’s position above the Bollinger Bands mid-line and comfortably clear of the lower band on the daily chart. However, the pair remains below its 100-day Simple Moving Average (SMA), leaving the broader recovery constrained. With the Relative Strength Index (14) strengthening to around 56, bullish momentum appears to be improving without yet becoming decisive, while the price fluctuates between support from the bands and trend resistance overhead.

The first significant hurdle is the 100-day SMA at 0.5775, where a daily close above resistance would create scope for a more lasting rebound. Initial support lies around 0.5705, in the upper Bollinger Band area, ahead of the mid-band near 0.5635. A breach of the lower band at approximately 0.5565 would leave the pair vulnerable to a deeper decline within its existing range.

(The technical analysis of this story was written with the help of an AI tool. Know more.)